Wednesday, May 14, 2014

Renters are short housing

Josh Barro talks about turning renters into savers so that the one benefit he acknowledges for buying a house -- forced savings -- is captured via another mechanism.

I'm not going to talk too much about why saving can be a macro-economic mixed good -- for example, if higher savings are not coupled with higher deficits, you can get a recession -- but I would like to talk about a benfit of buying not listed by Barro or McArdle: namely that we are born short housing.

Housing, unlike stocks such as Coca-Cola, is something everyone needs at least one of. So, with Coke, you begin in a neutral position and can then choose to go long or short it if you want to make a bet on whether COKE will go up or down. However, with housing, you begin needing one but not having one which means you are short right out of the box. Being short by default means you are speculating on house prices, which may be something you are not interested in doing, in which case buying a house makes you neutral, and leveraging up to buy more house than you can afford or buying multiple houses makes you long. Renting a house leaves you in a short position.

Therefore, with some irony, getting into the housing market is what you need to do in order to get out of the housing market.

11 Comments:

If you are in the fortunate position to have enough wealth to be able to buy your own house outright, then this is a good argument to do so. If you simply stick the cash in the bank and rent, you are running an open position.

However, if you have to borrow to buy it's not so straightforward. You may have eliminated your short position in housing, but you have taken on a massive short position in dollars.

Thanks for your comment. You are right, if you take on debt it is a short position, but if you stay in cash, that's a long position. And in times of high inflation, a real asset like real estate isn't bad for diversification.

I would simply see it as a levered position, and you get some diversification on the side. If it's extremely levered, then it is long housing/short dollar. I'm not sure what "normal levered" might be ; )

Family blog. Please edit out the (mild) bad language or I'll take down the post, which I don't want to do.

The house is an asset, but the need for housing is a liability. You don't need to own a house to meet that need, you can rent, but doing so means you are exposed to increases in house prices along with the (assumedly) corresponding increases in rent. Not a perfect relationship, but it's there.

As you yourself point out, being hurt by rising prices is common in a short position.

If you own a house, then you are neutral. If house prices go up, yes you can sell your house for more money, but the next house you buy (or rent) will cost more as well, negating the gain. Same for falling prices. Leverage complicates this picture, but I think the fundamental dynamics are as I have described.

If you have multiple houses, perhaps some are investment units, you are long because you can actually benefit from higher prices via more rent/the ability to sell houses without having to buy replacements.

I can see what you're saying and I think I'd agree that it's not completely analogous with what we'd normally think of as being long or short, but I'd still say there is some merit in this way of looking at it.

At the risk of sounding overly mainstream, imagine a rational optimising household which happens to have big pot of cash. It plans its future consumption and supply of labour based on expected wage rates and prices. Part of that consumption will relate to housing services.

Of course, prices may turn out to be different to what was expected, in which case the consumption or labour supply will have to be different to what was planned. However, if it uses the pot of cash to pre-purchase some of the services it intends to consume, then the household reduces the level of uncertainty. That's what buying a house does and it looks to me very much like covering an open position.

Of course, buying a house generally delivers housing services for longer than someone's life. So, for someone planning over only their own life, owning a house means owning the right to more housing services than they will consume. So they could be said to be long the excess. It depends on what you think people's time horizon is here.